Did those thousand-pip moves excite you?

Before we start betting the farm based on our analysis of the COT report, remember that those were just specific cases of when the COT report signaled a perfect market reversal.

The best thing to do would be to backtest and look at reasons why a reversal took place.

Was the economy booming?

Or was it in the middle of a recession?

Remember, the COT report measures the sentiment of traders during a specific period of time.

Like every other tool in your toolbox, using the COT report as an indicator does not always correlate to market reversals.

So take the time to study this report and get your own feel of what works and what doesn’t.

Also, before we bring this lesson to an end, always keep in mind that market prices aren’t driven by solely COT reports, Stochastic, Fibonacci levels, etc.

The markets are driven by the millions of people reacting to economic analysis, fundamental reports, politics, Godzilla attacks, UFO sightings, Lady Gaga concerts – life in general!

It is how you use these tools that will help you be prepared for what lies ahead.

In conclusion…

• As forex traders, it is our job to gauge what the market is feeling.

• One way to gauge market sentiment extremes is through the Commitment of Traders Report.

• By understanding the activities of the three groups of traders (commercial traders, non-commercial, retail traders), we can find ourselves in better positions to fish for tops and bottoms.

• Remember, every market top or bottom is accompanied by a sentiment extreme, but not every sentiment extreme results in a market top or bottom.